Aussie dollar hostage to offshore events

The Australian dollar is hostage to developments in slow-moving Sino-US trade talks, though sentiment did get a lift from hints of progress in avoiding another US government shutdown.

Republican Senator Richard Shelby, one of the congressional negotiators working on border security, said late on Monday that an "agreement in principle" had been reached.

US and Chinese officials expressed hopes on Monday that a new round of tariff discussions would bring them closer to easing their seven-month trade war.

The Aussie dollar inched up to 70.74 US cents, just a whisker above a five-week trough of 70.54 US cents which also marks major chart support.

Domestic economic data were mixed and did nothing to change the market's dovish outlook for interest rates.

A closely-watched survey of Australian business showed a welcome bounce in January after an alarmingly sharp drop the month before, but still pointed to cooling growth ahead.

The National Australia Bank's index of business conditions, released on Tuesday, rose 4 points to +7 in January.

That recovered around half of December's steep slide and left it just above the long-run average of +6.

As a result, NAB dropped its call for the next move in rates to be a hike in late 2020.

"With inflation remaining weak and growth weaker than the RBA expected, the risk is that the Bank will act to bolster the economy should the labour market show any signs of deterioration or consumer spending weaken further," said NAB chief economist Alan Oster.

Just last week the Reserve Bank of Australia was forced to cut its forecasts for economic growth and inflation after a run of disappointing data.

RBA Governor Philip Lowe tempered a long-held tightening bias, saying an easing might be just as likely as a hike.

Investors have sharply narrowed the odds on a cut in interest rates this year, with futures implying a 76 pe rcent probability of a quarter-point easing by December.

Strains in the housing market were also underlined by figures showing a steep 6.1 percent slide in the number of home loans taken out in December.

Australian bond yields are near their lowest since late 2016, with three-year yields at 1.668 per cent moving closer to the 1.5 per cent overnight rate.